How Do Electricity Shortages Affect Productivity? Evidence from India

Abstract

We develop a hybrid Leontief/Cobb-Douglas production function model that characterizes how input shortages affect firms. As a case study, we analyze how “power holidays” affect daily production at large Indian textile plants, using data from Bloom et al. (2013). We then study the short-run effects of electricity shortages on all Indian manufacturing plants between 1992 and 2010, using archival data on shortages, previously-unavailable panel data, and an instrument for shortages based on variation in hydro reservoir inflows. We estimate that electricity shortages are a substantial drag on Indian manufacturing, reducing output by about five percent. However, productivity effects are smaller: because electricity is a small share of costs, higher-cost selfgeneration increases energy costs by only about 0.15 to 0.5 percent of revenues, and because most inputs can be stored during outages, the productivity loss is only a fraction of the output loss. We also show that because of economies of scale in self-generation, shortages impose much greater losses on small plants, suggesting an additional distortion to the firm size distribution in developing economies.

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